Mere misclassification or omission does not justify extended limitation absent deliberate tax evasion.

The respondent, a construction company registered under the taxable-service categories of Commercial or Industrial Construction Services (“CICS”) and Works Contract Services (“WCS”), discharged service tax under the CICS category both before and after 1 June 2007, when WCS was introduced as a distinct taxable service.

The Department alleged that the respondent’s composite contracts involving services and materials were classifiable under WCS, and that it had not opted for the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

A show-cause notice dated 30 September 2015, invoking the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994, proposed recovery of differential service tax of ₹2,54,64,515 for October 2010 to June 2012, with interest and penalties.

The adjudicating authority confirmed the demand and imposed a penalty of ₹10,000.

The CESTAT upheld the demand on merits but set aside the order on limitation, holding that fraud, suppression, wilful misstatement, or intent to evade tax had not been established.

The Commissioner challenged that decision before the High Court.

Whether the CESTAT was justified in setting aside the demand and penalties as time-barred on the ground that fraud, suppression, wilful misstatement, or intent to evade tax had not been established.

Whether the respondent’s continued classification of its services under CICS, instead of WCS, and its failure to disclose taxable value under WCS constituted suppression or a positive act warranting invocation of the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994.

The Court applied the proviso to Section 73(1) of the Finance Act, 1994, under which the extended limitation period can be invoked only where non-payment or short-payment results from fraud, collusion, wilful misstatement, suppression of facts, or contravention of statutory provisions with intent to evade tax; Sections 75, 77 and 78 govern interest and penalties.

Relying on Chemphar Drugs and Liniments v. Collector of Central Excise, Easland Combines v. Collector of Central Excise, Pushpam Pharmaceuticals Co. v. Collector of Central Excise, Collector of Central Excise v. H.M.M. Ltd., and Lipi Boilers Ltd., the Court reiterated that mere inaction, omission, failure to declare, or incorrect classification is insufficient; a deliberate or positive act evidencing conscious withholding of information and intent to evade tax must be proved by the Revenue.

The Court also applied the principle that where the relevant facts are known to both the assessee and the Department, an omission does not constitute suppression, and the burden of establishing suppression lies on the Revenue.

The Court found that the respondent had consistently filed returns under the CICS category and that the Department had not issued any notice within the ordinary limitation period challenging that classification.

More significantly, the Department had audited the respondent’s accounts in 2013 and raised an objection regarding classification, but did not issue a notice at that stage, demonstrating that it was aware of the relevant facts well within the limitation period.

In these circumstances, the respondent’s explanation that it entertained a bona fide belief regarding the correct classification was accepted.

The mere fact that the respondent classified composite construction services under CICS, or failed to declare taxable value under WCS, did not establish any positive, deliberate act intended to evade service tax.

Since the essential ingredient of wilful suppression or intent to evade tax was absent, the extended limitation period could not be invoked; consequently, the demand and penalties were unsustainable on limitation.

The High Court held that the CESTAT had correctly concluded that fraud, collusion, wilful misstatement, or suppression of facts accompanied by intent to evade tax had not been proved.

The impugned CESTAT order dated 26 July 2022 was upheld, the appeal was dismissed with no order as to costs, and all pending applications, if any, were disposed of.